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OPISAS REinsight: The hot summer of the US residential real estate market

22. junio, 2020


The hot summer of the US residential real estate market: leap of demand, prices growing, mortgages with minimum rates, increase in rent fees, payments on time.

Among Americans, home remains the primary good by definition and therefore investing in residential real estate in the United States proves to be a more than sound option for international investors.

When the COVID-19 pandemics reached the States, most analysts foreshadowed the breakdown of real estate market, but the first data now available are telling a whole different story. This is what emerges from the periodic analysis conducted by OPISAS REinsight, the observatory on international real estate markets promoted by OPISAS. Figures from May and June clearly show and define the framework for a steady rebound, at least for what concerns US residential real estate market.

In fact, demand skyrocketed by +25% above pre-covid level (it was down at -30% in April, according to Redfin, one of the foremost US broker networks) and potential buyers seem to not give credit to a possible second outbreak of the pandemic nor to the protests raging all over the country.

A strong support to demand should come from the ever-decreasing interest rates of loans. According to Fannie Mae (Federal National Mortgage Association, the colossus with government support – GSE – which secures a considerable share of American mortgage loans), the yearly average rate for 2020 will be 3.2%, definitely a decline from the 3.9% in 2019. That would break the record of 3.65% set in 2016, according to data by Freddie Mac (the Federal Home Loan Mortgage Corporation, the other GSE – Government Sponsored Enterprise – born, along with Fannie Mae, from the nationalization which followed the 2008 subprime crisis, and specialized in issuing loan mortgages and reselling them on the secondary market). Fannie Mae also foresees that rates will break the 3% wall and drop to 2.9% in 2021. The effects of such a low interest rate can be already noticed in the increase saw in June, for the ninth week in a row, of +8% mortgage requests for purchasing residential real estate, reaching the maximum level in over 11 years (according to the weekly survey by Mortgage Bankers Association – MBA – related to the week ended on June 12, 2020).

The volume of real estate for sale decreased as well, –5% when compared to the same period of the previous year, an overall modest percentage especially when considering the strict lockdown measures enforced in most of the country, as anticipated by Mr. Joe Schneider – Director of Global Strategy and Engagement at NAR (National Association of Realtors, which represents 1.4 million US professionals) – during a recent Webinar on the future of international real estate markets.

In this case, current trends seem to foresee that a greater amount of real estate supply may soon be on the market, even if there are brakes bound to coronavirus. Contrarily to a buyer who is able to choose which home to visit, a seller has to get in touch with an unlimited number of people until a property is be sold.

Right now this decrease does nothing but aggravate the historical lack of inventory that contributed to the continuous increase of residential values in the last 10 years. The lack of homes for sale, indeed, afflicts US real estate market from well long before COVID-19 appeared, especially for what concerns new constructions. Suffice to consider that from 2009 to 2019 American developers sold 5.2 million new single-family houses; in the previous decade, instead, figures were exactly the double with 10.4 million new houses sold (Source: U.S. Census Bureau). Pandemic has definitely worsened the situation. If during the lockdown those who wished to sell their home found it to be difficult, and even today a few obstacles remain, on the other hand developers found themselves without workforce and in great difficulty for finding both materials and furniture.

Therefore, the amount of new single-family houses that will be completed will drop to 770,000 units this year, the lowest point since 2015, according to an analysis conducted by Mr. Lawrence Yun, chief economist at National Associations of Realtors (NAR) based on the so-called Housing Starts (Privately Owned Housing Starts: 1-Unit Structures) which from 1959 measures on a monthly basis the number of houses for which construction works had started.

And think how economists had forecasted, early this year, that 2020 would have been the year with the greatest expansion of domestic constructions since 2007, while now they are forced to state that new constructions won’t be able to fix the historical lack of houses for sale once more.

According to NAR, the 1.47 million properties on market registered in late April has been the lowest figure ever recorded.

In order to fully understand the intensity of this bottleneck and its effects, it is interesting to compare the current figures to those of the Italian situation, for instance, in which there is currently about 1.5 million houses for sale against 1.47 million in the United States, from NAR’s last check. But, in Italy are currently living 60 million people, while beyond the Atlantic there are 330 million residents.

These figures cannot help but generate opposite effects on sales time: in Italy, on three houses for sale, only one is sold in about seven months and a half, while in the USA a house is sold in less than 78 days (2019 average according to Zillow – Major US real estate portal). Liquidability of a real estate investment is thus diametrically opposite in the US and Italy.

Early post-covid data in the USA seem to suggest a further curtailing of this timeframe: the percentage of recently listed homes whose sellers will accept an offer within 14 days from day one has increased from 42% in May to 47% in the first week of June (Source: Redfin).

The combined action of demand increase and supply decrease led to a growth of prices: +3.1% for actual sales, and +9.9% for the initially proposed amount (Source: Redfin).

But how to explain such phenomenon? What is happening seems to be a strong change in purchase behaviors of Americans, indirectly determined by lockdown measures. All of a sudden, millions of Americans found themselves forced to live with their own families under the same roof H24 realizing, for instance, that their home was not large enough to ensure privacy and comfort to each component. Or, as smart working spread out, many decided to move to less chaotic neighborhoods with better services for their kids and family. For the same reason, others preferred to move to the suburbs or to smaller and cheaper towns. Moving on, many people who moved for job reasons to great metropolises are starting to consider how they may now come back to their areas of origins.

In short, once again Americans’ social, working and real estate dynamism is proving to be one of the main drivers for this market.

Figures of residential rents are, if possible, even more striking. The trend of rent values, in fact, didn’t even change. The Consumer Price Index (CPI) related to the average of residential rents of Primary Residence in US urban areas has, indeed, kept growing during the whole pandemic period, marking +3.49% in May year-on-year (+0.20% on April with a slight inertia-induced growth month-on-month as well).

Punctuality of payments has also remained more than stable, thus making an investment in US residential market with rent yield one of the soundest options in the landscape of international real estate.

In fact, this May, 95.1% of rents have been regularly paid, +0.5% if compared to April and just -1.5% to May 2019, when there were diametrically opposed economic conditions (unemployment at its minimum, for instance).

Again, how could this apparent inconsistency with economic reality be explained? Very likely, the inputs promptly issued by the federal government, such as CARES Act and other programs, have provided an unprecedented financial aid to households. In April, the US average personal income had increased by +10.5% on a monthly basis, more than twice the previous record. Government social aid expenses increased by 90% and hit another historical record of $ 6.300 billion. An astonishing amount of money for a country like the United States, in which welfare has always been opposed and often considered synonym with Communism.

Figures clearly show that the average American, even if going through hardships, decided to use part of the aforementioned federal aid for paying its rent fees first. That confirms once more that for Americans having a roof above their head is the primary need by definition.

Now the signals of economic recovery are more than substantial and, with surprising speed, real economy is moving on again, stacking and in perspective replacing the still ongoing government aid.

In May, work market showed an unexpected and marked inversion, with 2.54 new million jobs. Analysts previously agreed on expecting a further -8 million jobs decrease, but the recovery capabilities of American economy and the positive impact of the government’s efforts in the framework of the occupancy protection program worth $ 2,000 billion contributed to this decisive turnabout.

On top of that, retail sales rebounded in May with +17.7% ($ 486 billions), when thousands of shops and restaurants reopened and the combined action of federal stimuli and tax refunds fueled consumption.

The increase surpasses expectations, by bringing figures close to pre-lockdown levels. It has to be held in mind that in May a part of the United States did not already remove restrictions on shops; as for today, not all shops are authorized to reopen in some parts of the country, like New York. It is possible to hypothesize that with June figures will be showing full recovery, in a record time.

The United States therefore once more prove to be highly flexible and reactive: non only for their speed and range of public expenses and monetary policy maneuvers, but for the very nature of their economy and society. If it is true that falls are faster and more intense, the American system manages to get up earlier and with more stamina.  

Mark Zandi, chief economist at Moody’s Analytics, seems to have had the right insight, when he revealed to the Washington Post that this coronavirus-induced recession will probably pass to history as the heaviest and shortest of all. This scenario seems now more than plausible, at least for what concerns American economy and in particular residential investments with rent yield in the USA.




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